AGCO Corp (AGCO) 2006 Q4 法說會逐字稿

Good day, everyone. Welcome to AGCO Corporation's 2006 fourth quarter earnings release and conference call. Today's call is being recorded.

At this time I will turn the call over to Mr. Greg Peterson, Director of IR. Mr. Peterson, please go ahead.

Thank you for joining us for AGCO's fourth quarter 2006 earnings conference call. During this conference call we will refer to a slide presentation. The slide presentation, earnings release and our financial statements are posted on our website at AGCOCorp.com on the investors and media page in the calendar of events section. The non-GAAP measures used in the slide presentation are reconciled to GAAP measures in the appendix to the slides. On the call with me this morning, I have Martin Richenhagen, our Chairman, President and Chief Executive Officer, and Andy Beck, our Senior Vice President and Chief Financial Officer.

Before we get started this morning, let me remind you that during the course of this conference call we will make forward-looking statements, including some related to future sales, earnings, production levels and restructurings. We wish to caution you that these statements are predictions and that actual results may differ materially. We refer you to periodic reports that we file from time to time with the Securities and Exchange Commission, including the company's Form 10-K for the year-ended December 31, 2005. These documents discuss important factors that could cause the actual results to differ materially from those contained in our forward-looking statements. A replay of this call will be available on our corporate website for the next 12 months. I will now turn the call over to Martin.

Thank you, Greg, and good morning. Slide three summarizes AGCO's sales and earnings for the fourth quarter and full year of 2006. Our fourth quarter sales were up 18%, compared to the fourth quarter of 2005, largely due to the strong performance of our business in Europe, improving results in South America and our inventory reduction efforts during 2005. As you recall, in 2005 we took actions to reduce inventory levels by shutting down our factories during the fourth quarter. In 2006, our level production schedules resulted in more normal levels of production and dealer shipments throughout the year. AGCO's consolidated fourth quarter results were impacted by record performance of the Europe, Africa, Middle East segment, where quarterly sales exceeded $1 billion and annual sales exceeded $3 billion for the first time in company history. Brazil's stable economic policy following the recent election and improving commodity prices drove industry improvement during the fourth quarter and strong growth in both sales and operating income in AGCO's South American segment. Weaker industry demand in the North American and the Asia-Pacific regions partially offset the growth in Europe and South America.

The continued emphasis on working capital during 2006 drove a reduction in inventory and receivables. After removing the impact of translation and the changes in the accounts receivable securitizations, our inventory and receivables were down approximately $120 million, compared to year-end 2005 balances. Our strong result in Europe combined with the successes of our working capital initiatives resulted in strong free cash flow. For the full year AGCO generated over $300 million in free cash flow. Adjusted diluted earnings per share for the fourth quarter of 2006 was $0.41 per share and for the full year adjusted diluted earnings per share was $1.12.

Slide four shows our production schedules for 2006 and 2005. You can see from this bar graph that our production levels for tractors and combines in the fourth quarter were in line with earlier quarters in 2006. However, compared to the fourth quarter of 2005, our production was up 23%. Last year's production cutbacks in the second half of the year were a reaction to both the weakening market conditions in North and South America and dealer inventory levels in the United States. The more normal levels of production and dealer shipment in the fourth quarter of 2006 had a positive impact on sales relative to the fourth quarter of 2005. For the full year of 2006, our production was approximately 9% lower than last year. Nearly all of the reduction occurred in plants that supply our North and South American markets but production for our European business was up about 8% from 2005 levels. The level production schedule in 2006 also reduced the seasonal increases in inventories and receivables which we experienced in 2005. In 2007, we expect our production schedule to be relatively stable as we continue our efforts to reduce working capital.

Slide five now looks at global farm equipment volumes for the full year of 2006. Market demand in North America during the fourth quarter continued to lag 2005 levels. Industry unit retail tractor sales were approximately 3% below the fourth quarter of 2005, and for the full year industry tractor volumes were also 3% below the prior year. We saw the largest declines in the over 100-horsepower and the four wheel drive categories, which for the full year of 2006 were below 2005 by approximately 13 and 15 respectively.

In 2007, we expect strong commodity prices to drive higher cash receipts, but uncertainty around the new farm bill will likely keep industry equipment sales flat versus 2006.

Industry tractor volumes were up modestly in Europe, as with last year with strong market conditions in Germany, the U.K., Scandinavia and Central and Eastern Europe offset weaker markets in France, Italy and Finland. AGCO's recognized brands, improving product line and strong distribution network across Europe combined with healthy market conditions drove AGCO's volume higher in 2006. The order board in Europe remains strong through the end of 2006. In 2007 we look for continued expansion in eastern Europe to offset a slight reduction in sales in Western Europe driven by an expected decline in Germany.

Brazil's industry tractor volumes continue to recover during the fourth quarter but weakness in Argentina and the other South American markets offset the growth in Brazil and led to a slight decline in total South American tractor demand for the full year of 2006. We expect higher crop prices to drive higher farm income in Brazil during 2007. We further expect that higher farm debt levels will temper demand and keep total South American industry equipment demand flat compared to 2006. With that, I'll turn the call over to Andy, who will provide you some more specifics on our financial results.

Thank you, Martin. Slide six highlights regional net sales. The charts on the right show our regional sales performance excluding the impact of translation. For the fourth quarter 2006, translation had a positive impact of approximately 6.9%. On year-to-date basis, translation for 2006 had a positive impact of approximately 2.1%.

Excluding the impact of currency translation, the Europe Africa Middle East segment had sales growth of approximately 21% during the fourth quarter of 2006, compared to the fourth quarter of 2005. The growth in our European segment in the fourth quarter was led by Germany, Eastern Europe, France and the U.K. Fourth quarter sales in North America decreased approximately 10% compared to the fourth quarter of 2005, excluding currency translation impacts.

Full year sales in North America were down 21% from 2005, due to weaker market conditions and retail inventory reduction efforts that lowered our dealer shipments. Weaker market conditions, particularly in large row crop tractors, four wheel drive tractors, combines and sprayers drove most of the decline. Despite the weak market conditions, we made solid progress with our inventory reduction efforts. At the end of the fourth quarter, dealer inventories in North America were approximately 14% lower than the same point last year.

In South America, fourth quarter sales improved approximately 27% from last year, excluding currency translation impacts. Improving farmer sentiment driven by stable economic policies and by higher commodity prices contributed to the higher volumes in Brazil.

Our fourth quarter sales in our Asia-Pacific segment declined approximately 17% from 2005, excluding the impact of currency translation due to weaker market conditions in Australia and New Zealand. Parts sales for the fourth quarter of 2006 were $180.3 million, up 5.5% compared to the same period in 2005, after removing the impact of currency translation. Growth in Europe, South America and North America was partially offset by part sales declines in the Asia-Pacific region. For the full year of 2006, part sales were $752.8 million, compared to $734.4 million in 2005.

Slide seven highlights our sales and margin performance. Improvements in productivity and a change in both geographic and product mix offset lower production and currency pressures which kept gross margins flat for the full year of 2006 compared to 2005. Adjusted operating margin was 4.4% for the full year of 2006 compared to 5% for 2005. The slight decrease resulted from lower sales and higher engineering expenses.

2006 adjusted operating margins excluded a non-cash goodwill impairment charge of $171.4 million related to our sprayer business. In accordance with SFAS number 142, AGCO conducted its annual impairment test for goodwill and intangible assets during the fourth quarter. As a result of this analysis, the company concluded that the good will associated with its sprayer operations should be written off. The company remains committed to its sprayer business and has strategies in place to strengthen the sprayer distribution network, enhance the product line and improve future operating results.

Moving to slide eight, it illustrates the success we've had with our working capital reduction initiative. Much of our focus this year has been on North America but we've also made progress in Europe and South America. In North America at the end of December, on a trailing 12 months basis, our dealer month supply of inventory was as follows. Approximately 5.5 months for tractors and 7 months for combines and 6 months for hay equipment. While the long-term impact of lowering dealer inventories is positive, these efforts have had a significant impact on our sales and results in 2006. Our focus on reducing dealer and company inventories will continue in 2007. As a result, our North American sales will continue to feel some pressure. In the longer term our system improvements and plant rearrangements are expected to improve our capability to move more production to presale and build to order. Our distribution strategies are expected to improve inventory turnover and lower working capital.

Other working capital information is as follows. Funding under accounts receivable securitization programs was $429.6 million at the end of December 2006, compared to $462.7 million at the end of December 2005. Wholesale interest bearing receivables transferred to AGCO Finance, our retail finance joint venture in North America as of the end of December 2006 were approximately $124.1 million. Losses on sales of receivables, primarily under our securitization facilities, which is included in other expense net were $9.6 million for the fourth quarter of 2006 and $29.9 million for the full year of 2006. These amounts compare to $5.9 million for the fourth quarter of 2005 and $22.4 million for the full year of 2005. The increase in expense is due to higher interest rates in 2006 as compared to 2005.

Slide nine addresses excess free cash flow which represents cash flow from operations less capital expenditures. Free cash flow for the full year of 2006 improved to $313 million. In December, we shared our plan with you to invest more in 2007 for future growth. We expect to increase research and development expense and new product related capital expenditures. Even after covering these increased investments we expect to generate strong free cash flow in 2007.

Slide 10 shows how our net debt to total capital ratios have improved over the last two years. Our net debt to capital ratio was approximately 20% at December 31, 2006, compared to approximately 30% at the end of 2005. Total debt was $785 million at December 31, 2006. The company paid down approximately $100 million of debt during the fourth quarter.

EBITDA excluding restructuring and other infrequent items was $122.7 million for the fourth quarter of 2006. For the full year of 2006 EBITDA, on a same basis, was $376.3 million, compared to EBITDA of $376.7 million in 2005. Interest expense net for the fourth quarter was $14 million, and $55.2 million for the full year of 2006, compared to $15.3 million in the fourth quarter of 2005 and $80 million for the full year of 2005. Recall that in the second quarter of 2005, we redeemed $250 million of senior notes and that our second quarter 2005 interest expense included approximately $14 million in premium cost associated with that redemption.

Shifting focus to 2007, slide 11 quantifies the 2007 impacts of our strategic initiatives. In 2007 we will be making significant investments in our future in the form of increased engineering expense to support a growing list of new product programs, plant restructuring costs in our Hesston and Fendt manufacturing facilities. Costs associated with our European information system initiative, and spending associated with developing new markets and improving our distribution. Partially offsetting these costs will be the impact of lower interest expense resulting from our convertible debt offering completed in the fourth quarter of 2006, which refinances higher rate bank debt with the low coupon debt of the convertible bond. We will be relying on sales and margin growth to pay for these investments while generating an improvement in earnings in 2007, compared to 2006. We expect these initiatives to reduce first quarter results by between $5 to $7 million.

Slide 12 lists our preliminary view of selected 2007 financial goals, which remain unchanged from the December 12 analyst briefing. We are projecting 2007 sales to increase 3% to 5% driven by pricing, market share improvement, growth in Eastern Europe and the impact of currency translation. Our goal for 2007 earnings per share remains at approximately $1.30, and includes funding for our longer term initiatives. We expect our free cash flow to range from $115 million to $125 million. For the first quarter of 2007, a weaker sales mix caused by the timing of new product releases and supplier constraints as well as increased spending for engineering and other strategic projects are expected to reduce operating margins and operating income below 2006 levels. We look for first quarter earnings to be about break even to a slight loss.

That concludes our comments. Operator, we are ready to open up the call for questions.

[OPERATOR INSTRUCTIONS] And our first question comes from Terry Darling with Goldman Sachs. Please go ahead.

Good morning, gentlemen.

Good morning.

Andy, wondering if you could bridge the gap between the 1Q '07 outlook and the 1Q '06 actual. You've obviously talked about the $5 to $7 million hit which I think is about $0.07. I was wondering if you could talk about the other items in the mix there and then you mentioned production probably flat for the full year. But could you talk to us a little bit about the quarterly pattern here as you guys have been trying to flatten things out a bit?

Okay. First quarter our main issue relates to sales mix. As we talked about and you mentioned, we have that $5 to $7 million of additional engineering expense, some of these project expenses that we have already highlighted. The rest relates to sales mix, which we expect to reduce our margins by about 1.5 percentage points during the first quarter. That primarily relates in Europe to our Fendt business and Germany and at that Fendt, we have a significant amount of new products coming on-board here in 2007 and the high margin 900 series, we are ramping up very slowly here in the first quarter in order to control the quality of the new product. So our mix of production at Fendt in the first quarter is going to be mainly small tractors, which have a fairly significant lower margin than the big tractors that we'll be producing and catching up with that production throughout the balance of the year. The other issue that we have at Fendt is we do have some supplier constraints on availability of engines in the first quarter and that is expected to reduce the amount of sales that we would normally have achieved here in the first quarter. We expect that to be relieved throughout the rest of the year but in the first quarter we're really seeing a fairly sizable reduction in our Fendt income, which is pulling down our total results.

Very helpful detail, and then can you touch on the quarterly production profile here?

Sure. Quarterly production is going to be relatively consistent. First quarter we're expecting to be down slightly and then in the second and third quarters right now look to be up and then a little down in the fourth quarter.

Great. Thanks very much.

Thanks.

And our next question comes from Andy Casey with Wachovia Securities.

Good morning and thanks. Could you give a little bit more color on what you're seeing in Western Europe, specifically in Germany. It had a very strong Q4. You mentioned that the order books for Europe, Africa and the Middle East are strong. But you also kind of guided down Germany for the year. And I'm wondering what your thought process is there. Thank you.

Well, actually we are a little surprised that Germany still does do very well right now but also we want to be careful here so my -- our guidance is that we might see maybe a little slowdown during the year. We can't see it yet. Overall, Europe seems to be stable on a pretty high level. So there are certain things in Europe that are difficult to understand when you look at the last year, market in Germany was up by about 14% at the same time France was down substantially. So that means we try to understand what happened 2006 a little bit better by talking to our dealers and farmers and also try to get a better understanding of the market for 2007. It is a little difficult right now but we are optimistic that at least the market will be more or less on the level of 2006.

Okay. And just to follow up on that, Martin, so if I hear you correctly, the changeover in the VAT in Germany really has not affected any demand in the near term?

Yes, that was our position from the beginning, but since so many people talked about it and it get excited about it, we also didn't know exactly what would happen and actually we didn't see a big impact on coming from the VTA so far.

Thank you very much.

You're welcome.

And our next question comes from Ann Duignan with Bear, Stearns.

Ann Duignan here.

Hi, Ann, good morning.

Could I just step back again to what you talked about with supply constraints from engine suppliers? You really only get engines from one or two suppliers, Cummins and Caterpillar, or Perkins. Is it external engine supply constraints you're having or is it [situ].

Fortunately -- or unfortunately, it depends on how you see it -- it's external. And it's not Caterpillar and Perkins and it is the engine in the Fendt tractor and I talked with a Deutsche CEO this morning. He was okay with me mentioning them because he has a problem as well when he talks about his first quarter. They have some problems in machining, coming from casting and so on with mainly the product they are using in agricultural equipment and construction. And we are -- alet's say we were facing that already for the last quarter 2006 and could fix it more or less and now we are struggling again a little bit. I do not believe that this will have an impact on 2007 in total. But it will have an impact most probably on 2007 first quarter.

Okay. So it's the Fendt tractor that's seeing the lions' share of the problem.

Yes. And then you know that of course this has of course also an influence then on our sales mix, because Fendt normally has a little better margin than other products we have.

Okay. And then just a quick follow-up, two quick follow-ups. One, can you update us on the Challenger product line and why we wouldn't see shipments in North America as a little stronger in '07 as you fill out that product line, even if the market is flat and then just a quick update on your implementation of the new ERP system, can you just give us some time lines as to when you expect to go live with that ERP system.

Andy.

Okay. On Challenger sales we would expect to see some improvement in 2007. Right now we're seeing the Challenger dealers be relatively conservative with their ordering. I think they're very focused on throughout their entire business on getting their inventories down. So we're hopeful that we get some momentum here later in the year and we'll see the Challenger sales increase from this year. This year certainly there was a impact of lowering dealer inventories at the Caterpillar dealers. From a retail standpoint, our retail sales at Challenger did improve over 2005. As it relates to our ERP system, that relates to a project we're really just starting in Europe. The time line for getting that project completed is the first site roll-out would be sometime during the middle to late part of next year and then it's about a three to four year project for the full completion of the project throughout Europe.

Okay. Thank you very much.

You're welcome.

And our next question comes from Barry Bannister with Stifel Nicolaus.

Hello, it's Barry from Stifel Nicolaus. How are you?

Hi, Barry. So far so good.

Good quarter. Would you comment on three little things. One, tax rate in '07 and what you're expecting.

Sure. On tax rate for '07, we're expecting to be a little better than '06 when you take out the charges that we had and be slightly under 50%. So somewhere between 45% and 50%. We're still impacted by losses in North America, which we're not booking any benefit on those losses and so that's pulling up our effective rate. So as -- depending on how much improvement we can achieve in North America will drive that improvement in the tax rate as well. And so we are expecting to improve our North America results in 2007 and as a result that tax rate should come down a bit.

That's book and cash flow tax?

That's -- yes, that's about right, yes.

The Challenger business, could you give us the sales and the profits for the full year versus the year before and if there's any business plan to improve that result?

Sure. In 2006 our sales were about 10% below 2005, 2005 was about $320 million. 2006 about $290 -- a little under $290 million. As I've pointed out before, that's the wholesale activity and on a retail sales basis, our retail sales were slightly up in our Challenger operations. From an income standpoint, because the sales were down, we were at a loss position. Again, 2005 we lost money, 2006 we lost a little more than '05, and then in 2007 we expect to improve that with higher sales because we hope -- we expect to sell more on a retail basis and expect less inventory reduction to occur in 2007. So our business plan for Challenger is to focus on that distribution network in North America, give them new products. We have some significant new products for them to sell this year and also they are active in our eastern European business with dealers in those markets and we are growing our Challenger business in eastern Europe as well.

And I assume that other people ask about Brazil, but just on the North American sprayer business historically that was about a $300 million business with a 10% margin. Obviously it has deteriorated. Has there been some change in the economics of the sprayer business or your participation in it? Perhaps you're selling to contractors and the farmers are doing it themselves?

Yes, we actually -- traditionally we cover the upper end of the market with direct sales and this is slightly changing as you describe it and we will adapt our distribution. It's too premature to talk about it but we will fix that, and then of course we had some new players in that business as well and in addition to that, we had some internal problems, quality, and we need also to work on a face lift for certain products. So we are very optimistic that this stays a very important business, not only with regard to the revenues but also with regard to the margins but we need to do our homework.

Your new business plan includes a Deere hunting permit?

Yes.

Operator, I think we're ready for our next question.

Okay. Our next question comes from Mark Koznerek with Cleveland Research.

Hi, good morning. It's Adam Uhlman filling in for Mark today. The first question I guess since Barry teed it up, could you talk about the environment in South America and in Brazil? It seemed like demand has come back recently. What are the impediments to growth in 2007, I guess maybe outside of the higher debt levels by the farmers?

Well, actually when you think about South America it's always a little bit risky to be, to do a plan or forecast on South America. It's still a little more volatile than other markets. First of all, we have new management in place and we are running our South American operation with a senior staff member who is Brazilian, which is -- certainly helps us to understand the business better, and we also added one Brazilian director to our Board which comes from the industry and understands both North America but also the markets in South America.

How I see it right now is first of all, the elections as you know were over, no change, which is certainly helping to stabilize the country. Second, commodity prices are up. Third, climate conditions are better. So that should normally all be in favor but I would like to ask Andy to explain to us what happens in the area of refinancing, because this might slow down demand.

That's correct. I think you know we've seen some nice improvements in South America from very low levels, and what our colleagues in South America are telling us is that commodity price improvements will, is starting to help the soy bean farmer become profitable again. Even in the Mato Grosso region, where they're at break-even, they're starting to be profitable at these soy bean prices. And so that's very positive news for us. Unfortunately, they still have a fairly significant debt load that they need to start servicing. Recall that the debt service payments for these farmers has been put on holiday for the last two years and as of today, there is no additional holiday being granted. So the farmers will have to make debt service payments here starting this year. And so as a result, we see that, you know, keeping the growth level or keeping the market fairly flat. Even though income levels are up and things are looking better for the market, we think they've got to get this debt situation past them before we see the market recover more.

Okay. What does the order board look like in South America right now and could you also -- you had commented on Europe but can you talk about the other regions?

Our order boards around the world are relatively good. Probably a little better than last year.

Okay. And then just a broader question. You know, it just seems like market conditions have improved recently and in North America and South America and Germany is doing really well, or at least your shipments were really strong in the fourth quarter. If actual end market demand came in better than expected, you know, could you talk about your manufacturing flexibility and your suppliers' ability to ramp up should the market demand come in 10% better than expected?

Actually, we are also optimistic but we want to avoid that somebody does get too excited or carried away because some of our -- some people are maybe a little bit too optimistic about North America. So we try to manage also Europe expectations in a way. We have enough capacity, remember that in 2004 we were in the position to handle quite bigger volume and with the only exception of an engine problem we are facing in Germany, which is not caused by demand but by some other problems coming from suppliers, I think we are in a position to handle also a volume which could be much higher than what we talk about right now.

Okay. Excellent. Thanks.

You're welcome.

And our next question come from Andrew Obin with Merrill Lynch.

Hi. Yes, good morning. I was a little bit late so I apologize if you've answered this question already. Could you comment on pricing in '07 by region?

That's a new question so you don't have to apologize.

Pricing is across the board going to average about 2%, Andrew. No big differences between markets.

And the second follow-up question to what Martin said, he said that some people are too optimistic about North America in '06. I'm wondering given where the commodity prices are, why do you think people are too optimistic about '06 -- '07 in North America?

Well, actually more or less because we don't see it yet and when you talk about 2006, for example, people look at 2006 and only look at the development of the commodity prices at the end of the year, while during the year farm income was down. So that means farmers do not see the improvement yet because they sold their harvest while most of their -- most of the crop prices were not where they are today. So therefore, I do not know exactly how positive the market will react and we are pretty much in-line with our competitors and I think everybody is a little more realistic about the expectations, while some people outside the industry might be a little bit too optimistic. That's how I see it.

What do you expect in just the last question, in terms of the acreage shift in North America between corn and soy beans, how many acres do you expect to shift between the two commodities in '07 and how will it impact South American production?

The numbers we heard and we think that they are realistic are about 10%.

And do you expect all this acreage to come back in South America in the fall?

In South America, the situation is a little bit more difficult to understand because a lot of -- for example, orange farming is going towards sugar cane and there are a lot of changes going on. Everything more or less pretty much is a direction of sugar cane costs by ethanol and so we, I think we'll be in a position to give a better answer in maybe two, three months.

Thank you very much.

You're welcome.

Next we'll hear from Charlie Rentschler with Wall Street Access.

Yes. I wanted to come back to sprayers. As I remember seven or eight years ago when Bob Ratliff bought AgChem you guys were top of the heap there and this was -- you never reported by segment but undoubtedly a very profitable business. Now to see that it's a total write-off and I know there's FASB this and that, but came as a real shock. Of course Deere announcing that they've taken over the number one position as the dominant guy in the self-propelled sprayer business. But it just feels like you've let your engineering deteriorate there, your product edge, and I guess my question is more a philosophical one, which is are you guys focusing maybe too much on working capital and squeezing down inventory and receivables and not enough on your product mix and your competitiveness there, using sprayers as an example?

Charlie, first off, you are pretty much in-line with my prediction because I knew that you would ask that question. Because you understand our business very well. But I actually don't see that Deere will take over market leadership easily. So we have certainly means how to defend our position, which includes that we have new management in place. We have a new leader we hired from outside AGCO that is an expert in this business. We are reconsidering our distribution and we are also investing money in engineering. What happened most probably was that we were a little late with our engineering activities in this area, but I'm very optimistic that we are in a position to also grow this business further in the future.

As you recall, also, we have reorganized North America and have a new management in place for North America as well. Very well reputed guy. You certainly heard about Bob Crane. He really understands the market and therefore I think we do not give up easily. When it comes to inventory reductions and things like that, I think this is an exercise we have to go through anyhow and I don't believe that this did hurt the sprayer business so much. We of course clear up or cleared up the pipe line a little bit, which I think is very good for the future. And with regard to the impairment, we just wanted to be very realistic and conservative and that doesn't mean that this will hurt us in the future or will stop us to push that business further. Charlie?

Yes, thank you.

Okay.

Thank you, sir.

Thank you.

Next we'll hear from Jamie Cook with Credit Swiss.

Hi. Good morning. Most of my questions have been answered. Just two quick follow-up questions. You talked about pricing in '07 up about 2% which I think is consistent with '06. Can you talk about what you're assuming for material costs and then my follow-up is you talked about currencies impact the of currency on sales. What was it on profitability in the quarter?

Okay. On the first question, on material costs, we're anticipating normal inflationary type increases that our purchasing material management teams focus on offsetting with cost reduction improvements, resourcing, things like that which would help us improve our margins in 2007. We don't see any significant changes in any of the major commodities. They seem to be relatively stable at this point in time. Jamie, can you repeat your next question?

And then my second question, you talked about the impact of currency on sales. What about on profitability?

Should be fairly neutral. We typically see the translation impact of the higher sales from the strengthening -- for example, the strengthening Euro being offset by, that impact, the positive being offset by the negative on the amount of product that we're importing from Europe. So what we'll see right now in 2007 assuming the exchange rates stay about where they are, is some sales growth in Europe driven by exchange, offset by some lower margins in North America as a result of those imported products.

Okay. And then I guess just to get to my last question. I mean, Andrew asked a question about North America and obviously there's a lot of people out there that are a lot more optimistic on the market. You mentioned in your prepared remarks the farm bill, et cetera. When you guys are talking to your dealers, can you just sort of tell us anecdotally, whether -- how concerned are they with the farm bill, especially with commodity prices being so high, and you have an election year in 2008. Is that just sort of you need to put it out there as a cautionary remark or is there real concern there?

Well, it depends. You know, that farmers in general are conservative and so when you talk to dealers you actually do get a summary on what they hear from the farmers. Even in an excellent year when you ask a farmer how are you doing he would say oh, not too well. So therefore, it's somewhat difficult to understand and we are actually -- we try to be realistic and we try to, let's say, deliver and so therefore I think it wouldn't help if you would now create excitement on North America before we really see it. So as soon as we would see a change, we certainly would communicate that to the Street also.

Great. Thank you very much.

You're welcome.

Next we'll hear from Robert Wertheimer with Morgan Stanley.

Good morning. I also had a couple quick questions on the revenue side. If I understand correctly on the Fendt issue, you expect to see sales sort of move from one quarter towards the back half of the year but you don't expect to sort of lose business or lose orders an a full year basis.

Exactly.

And second on South America, I guess I'm not sure I understand why Argentina is weak and I don't know if you can just add some background on that. And in Brazil, are you seeing -- I guess sales were strong in the fourth quarter for the industry. And do you thing that there's sort of a step function change as people see the debt payments come on in 2007 or shouldn't they have anticipated that in 4Q.

I think first let's go to Argentina. In terms of Argentina, they had some weather problems in 2006, a drought in certain regions. And I think that affected the sales. The other impact from an Argentina and really the rest of South America is a lot of the products sold in that market is supplied out of Brazil and as the Brazilian currency strengthened against the Argentine peso and other local currencies there, there is some pricing pressure because we along with our competitors are trying to pass along some of those currency impacts and that is having some impact on the markets demand as well. When you look at Brazil, I think it's kind of a point of comparison, fourth quarter of 2005 was extremely low and so we are getting some improvement there. But also the improvement is coming in sectors like sugar cane and citrus and things like that, not as much in soybean area, things like that. So as we go into 2007, we're going up against much harder comparables on the sugar cane side. We expect that market to continue to be strong because of the impact of the growing amount of sugar cane being produced and ethanol demand in South America. But from a soybean farmer standpoint, I think the debt situation is real, particularly in the growing Mato Grosso region.

Great. Thanks very much.

We will now hear from Seth Weber with Banc of America. Mr. Weber, your line is open.

We answered his question by talking about the weather. That's a tendency in our industry.

Mr. Weber, your line is open.

Okay.

We will now hear from Barry Bannister with a follow-up question from Stifel Nicolaus.

When I look at market conditions they are not created equally, and as I look back or think back to the last 10 years in North America when the market went south about nine years ago, you were the first to feel it. Deere felt it later. As it began to recover a little bit earlier on you felt it later than Deere and then we gave some back last year. But the opposite is true in South America. You've got a very strong position. Valtra's actually gained a good bit of share. So would you characterize what you're seeing in North America and the type of farmers you sell to, is not necessarily representative of the entire industry?

Well, when you look at the farmers we sell to, we actually -- you could split them more or less in two groups. On one hand we do quite some business with the very professional big farmers, which is caused, one, by our distribution, by the Caterpillar distribution and second also by the high tech products like the tractor, the new four wheel drive articulated or the new big combine. But on the other hand, there's also a market, developing market and growing market we call those lifestyle farmers. Those are smaller guys that buy low horsepower standard tractors, and we will introduce a new product for those guys in 2007, coming from our joint venture company factory in India. So I think we understand both markets but certainly some of our competitors who have very high market shares might have a better coverage than we do.

$When I look at how you beat your free cash flow guidance for the year by a factor of almost three times, are you being conservative in talking about just over 100 million in '07 or have you reached the end of what you think you can do in progress on the working capital front?

In general we always try to be conservative, but as you saw last year, we also wanted to be better than planned but couldn't make it during the full year. So that means we certainly want to be conservative and we want to deliver, but also we do not want to sandbag. So I think we have certainly here some potential. Andy how do you see it?

Yes, I think what we're looking for in terms of cash flow this year is continued reduction of inventories and receivables. I think we have some concerns that some of the increases in accounts payable and accrued expenses were due to some timing items this year and some of that could reverse here in 2007. And so I think that's part of the reason why we're giving a relatively lower number than we achieved in 2006.

And lastly, everyone's focused on soy beans in South America. If we do shift to corn that will be good. But biofuels down there are quite a revolution in terms of their impact and the export potential. You're going to introduce a cane harvester. Can you talk about Valtra, its harvester and whether Brazilians are indeed as I hear very competitive even with the tariff delivering ethanol to the east coast U.S. where there are no transportation issues from the Midwestern U.S.

Actually, what we do is we introduced a, or we're introducing a combine and we just did that. [Did normal] combine harvester. Fully differentiated, different design than what Massey Ferguson has. To the Valtra guys, coming from our factories, same combine factory in Santa Rosa. This is done, so to say. But we also work on a face lift for the other combines because we see that the Brazilian market is also now asking for more modern technologies and we want to be in a leading position there as well. Then -- which means that we bring a rotary combine to Brazil. Then we also work on the development of a sugar cane harvester, which will take something like maybe two years, two to three years, and this sugar cane harvester will be for the Valtra brand because Valtra is the leading brand in the sugar cane industry in Brazil.

And are your customers down there telling you they're excited about the potential for sugar cane beyond just the supply of the Brazilian market?

They are, yes.

Okay, thanks.

And we have time for one more question and that will come from Andy Casey with Wachovia Securities.

Thanks. And good morning again. Couple questions on the guidance. And one kind of piggybacks off Barry's -- one of Barry's questions about the inventory impact in North America. As you look at '07 and I think you talked about flat production versus kind of flat industry sales. Can you discuss what your targets are for some of the various field inventories, like tractors and combines, for example, in North America?

Yes. In North America as we said, we were at 5.5 months at the end of 2006. We're shooting to get that down by at least a half a month again in 2007. We're also looking to reduce our combine inventories probably more significantly in 2007 and a slight decline also in the hay business.

Okay. So you would expect to kind of underproduce probably in the initial stages of, if there is a pickup.

This is an ongoing initiative. So actually I am not yet satisfied with our inventory levels and we will work on that for the next few years to come. And because we think that we need to get inventories down all over the place, working close with finished goods but also dealer inventories and this is a, I say, very important initiatives, initiative we work on and we actually discussed it very quite a while and now we are starting to see results.

All right. I just wanted to revisit it. The second question, the Q1 guidance, were you expecting back in the December meeting that this engine supply chain issue would be behind you in Q4?

Yes, yes.

So it was somewhat of a surprise to you that it's spilling over in Q1.

Yes.

What plans -- I don't need the specifics, but what sort of plans have your supplier given you that make you comfortable it doesn't spill into any other quarters?

Well, actually I just talked with their CEO, by the way, it's interesting it's a German public company managed by an American CEO. Gordon Riske. And I just called him this morning and what they are doing, yesterday they shipped machining equipment from their factories to Spain, where the main bottleneck has been located. The problem is it's a different bottleneck than the one we had or we had to face in December. In December it was mainly coming from some kind, some hydraulics and electronic components and now it's mainly coming from machining and cylinder heads, and so this equipment will be installed this week and then we'll be operational this month. So -- and there are people there. We have also some people now getting involved. We have some people helping them to understand our situation better, and we of course have some experience in these areas as well and have some experts that go to Europe and that support the whole process.

Okay. And just remind me, is this engine supplier is basically, almost strictly Fendt, is that correct?

For us it's only Fendt, yes.

Okay. Thank you.

You're welcome.

And that is all the time we have for questions today. I would like to turn the call back over to our speaker, Mark Richenhagen and Chris Peterson.

In closing we appreciate your time and interest in AGCO. Should you have further questions I encourage you to contact Greg Peterson. Thank you for joining us this morning and have a nice day.

That does conclude today's teleconference. We hope that you have a nice day.